STAFF NEWS & ANALYSIS
So Many Lost Decades – Why?
By Staff News & Analysis - July 05, 2011

Is the UK following Japan into a 'lost decade'? At Nissan's headquarters in Yokohama, just south of Tokyo, the air conditioning is set permanently on 26 degrees. It's hot and sticky outside and it would be nice to have things a little bit cooler. Regrettably, it's not an option. Cars piled up in Natori, Japan, in the aftermath of March's earthquake and tsunami. It's the same everywhere in Japan. With the test of peak summer temperatures still to come, air conditioning is being heavily and widely restricted in an attempt to conserve energy. Office corridors go starved of artificial light, while reduced street illumination has caused a mild uptick in historically almost wholly absent petty crime. – UK Telegraph/Jeremy Warner

Dominant Social Theme: What's with these lost decades anyway? Who can explain them? Luck of the draw, eh?

Free-Market Analysis: Now UK columnists such as Jeremy Warner are worried about a British "lost decade." This is to follow on the heels of a Japanese lost decade. Of course, exactly which decade the Japanese have lost is debatable. From what we read in the mainstream media, Japan has lost at least three decades; poor people! Each decade that crawls by is announced as "lost" sooner or later.

America has attracted its share of "lost decade" appellations as well. Here's an excerpt from a recent article posted over at CNN. It's entitled "America's own 'Lost Decade.'"

The economy is still struggling. And Americans are in for a long and painful adjustment period. One major reason: their own household debt. Many experts say private debt owed by households, as well as businesses, is an even bigger problem than the government debt that's getting so much attention lately. And it won't be solved without a difficult stretch of high unemployment and slow growth that will likely last for six or seven more years, producing America's own version of Japan's "Lost Decade."

So there you have it. This article was posted last month; it proposes that America is four years into a ten-year slump. What's the reason for it? "Consumer and small-business debt." Of course, the article doesn't make clear why there is more debt NOW than before. Sure "debt" sounds like a good explanation but it would be nice to know where the debt came from and why it's so bad this time.

If misery loves company, then American consumers should be comforted. We've seen, above, speculation about a British and American "lost decade" competing with one or several of Japan's. But we're not done yet. Here's an excerpt from a recent UK Guardian article on Germany's role in strengthening the EU to avoid – you guessed it – a "lost decade."

Taking a lead does not come easily to [German Chancellor Angela] Merkel but the alternative is very likely a disintegration of the eurozone and the European Union, which would have unpredictable long-term economic and political costs … It is of course the case that readjustments and serious reforms … are necessary. But if the future you present in return for such reforms is still either a lost decade with huge internal deflation or crashing out of the eurozone with an unavoidable default on sovereign debt it is impossible to motivate people to pull up their sleeves and support reforms.

What's with these lost decades? The Telegraph article (excerpted at the beginning of this article) explains that Western governments have hurled everything but the kitchen sink at the West's sinking economies with little success. This is a surprise of course because the prescriptions of the patron saint of lost decades – John Maynard Keynes – were supposed to work with speed and efficiency. Government, having saved for a rainy day, would be able to use its surplus to "stimulate" investment.

In the 21st century it is hard to fathom that these palliatives would be taken seriously and yet they are. Governments and the elites that stand behind them are always desperate for public solutions to private problems. Keynes, a social Fabian and member of the upper crust Bloomsbury Group, came along at the right time. He didn't criticize central banks as FA Hayek did; instead he apparently recommended ways that governments could compensate for the ruin they produced by overprinting money for nothing.

It was Hayek, along with his mentor Ludwig von Mises, who came up with an explanation of how central banks triggered the destruction of the Western business cycle. Keynes, a central banker, came up with a number of other things, but we defy anybody to explain them. His prose was as tortured as his logic. Nonetheless, that hasn't stopped generations of politicians and central banks from using Keynesian nostrums …

Is the economy flat-lining? Are debts out of control? Is government spending unfathomably irresponsible? As a result are jobs virtually non-existent? Don't worry. Just print more money! "Create jobs." This is what the Obama administration just got through doing. It admits each job cost well over US$200,000 to create. Whether they still exist is an open question.

The UK has had a similar experience, the Telegraph's Warner informs us. "With output in the UK still way below pre-crisis levels, we are already virtually half way there to a Japanese- style 'lost decade.' Western policymakers appear to have been no more successful than their Japanese counterparts in lifting the economy out of its funk – in fact worse in some respects, as here in the UK we have both nil growth and elevated inflation."

So where does the UK "lost decade" talk come from? Apparently it's Pimco's Mohamed El-Erian. He's concluded that the UK may be following Japan into a "lost decade," Warner confides. El-Erian is actually a worse doomsayer than this. He believes much of the world faces a process of "Japanisation," according to Warner.

For El-Arian, "new normal" is what Japan has been experiencing for nearly 20 years now, Warner writes that Japanese households have been saving their earnings rather than spending them. "In these circumstances the state becomes the consumer of last resort, borrowing the private sector surplus and spending it to support demand in the stead of private consumption and investment."

Now the West seems fast to be following Japan into the same trap, he explains. The public indebtedness problem is a difficult one throughout the world and there are three ways to deal it: via inflation, default and taxation. Taxation is perhaps an especially clever government gambit as it both reduces the public deficit and penalizes thrift. This is good!

However, despite such a plethora of options, Warner is gloomy about Western prospects. Like El-Arian, he seems to foresee lost decades all over the place. Here is his conclusion: "So which way forward for Japan? Does it embrace the new global economy, or just resign itself to relative decline and attempting to grow old gracefully? It's a choice which increasingly faces all countries in the developed world."

We have something of a different conclusion. We begin by emphasizing that Keynes was merely a government apologist masquerading as something else. Always keeping his eye on the main chance, this former central banker developed an incomprehensible "general theory" that emphasized government action.

No wonder top bureaucrats like US President Franklin Delano Roosevelt invited him for extended stays and feted him at state dinners. FDR admitted he didn't understand anything that Keynes told him – the mathematics were beyond him, he said. But that didn't stop ole FDR from putting Keynes' faux-solutions into practice. It took a world war to begin to turn things around.

Keynesian solutions are entirely unbelievable. A Keynesian such as Warner apparently is, ends up proposing that higher taxes are an unmitigated good during a depression because they reduce savings while allowing government to pay down debt. As if those running government were ever interested in doing such a thing.

Government is often compared to a household by Keynesian types. The idea is that rational planning can generate good results. In reality, government types are usually quasi-sociopaths who do not care a wit whether budgets are balanced or tax money saved for the proverbial rainy day. When the Clintons abandoned the White House, they tried to steal the silverware. Literally.

Warner, to his credit, is suitably gloomy about the idea that one Keynesian bright idea or another can truly lift the West (or Japan) out of upcoming lost decades. Major changes in public policy might make a difference (if they were along Keynesian lines we doubt it) but absent radical action, such decades are probably a reality.

As we have reached the end of this article, we don't want to leave you, dear reader, with any false impressions. First of all, there are ways to prevent lost decades if one wishes to. And second-of-all, lost decades are not mysterious. They arise directly from central banking and the function of printing money from nothing. Over time, such money-printing distorts the economy to the point where it literally cannot recover. The economy, metaphorically, is stuffed like a goose until it explodes.

The pricing mechanism is endlessly damaged. The government through fiscal and monetary policy has so injured the free-market that it simply cannot recover. Banks do not know where to invest; entrepreneurs have no idea what business is actually healthy. New investments slow to a trickle. Jobs, once so plenteous, are not developed at all.

It is very simple. Government through fiscal and (Keynesian) monetary policy, has ruined the economy. Japan's economy is ruined. So is the economy of the EU (in large swathes anyway). Japan's economy has suffered for decades.

What is the cure for a ruined economy? It is very simple as well. Shut down central banks, shut down governments (as much as possible), cease to tax, cease to spend and let the private sector take over. To the degree that the pricing mechanism is re-established, the economy will recover.

What El-Arian is saying, if we wish to translate, is that lost decades will occur because government will not willingly deleverage. Just as the Japanese are trapped in their endless monetary funk because the major players will not remove the stifling straightjacket of social democracy, so the West is doomed to the same fate and for the same reasons.

There is nothing complicated about this. It needn't be bollixed up with Keynes' General Theory, or fiscal solutions or defaults, etc. If one wants prosperity, government needs to get out of the way. But this would entail, unfortunately, a diminishment of elite power.

It is the Western elites that have invented regulatory democracy and they will not willingly give it up. The simple solutions are never to be presented to suffering middle class masses. Instead, rhetoric will be produced that suggest during a depressive slump taxes ought to be raised or government ought to spend money to "stimulate."

Western elites cannot give up regulatory democracy because it is through regulations that they have access to levers of government. No regulation = no mercantilism. Everyone must suffer so the elites can retain their death grip on Western economies.

After Thoughts

Absent the re-imposition of a free-market there is ONE other way that Western economies may be stimulated – or at least the masses distracted from their misery. Surely you have guessed. It is a three-letter obscenity: WAR.

Posted in STAFF NEWS & ANALYSIS
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